KARACHI: Pakistani government has granted tax relief to commercial banks despite the banks are making huge profits in the wake of record high interest rates.
The State Bank of Pakistan (SBP) on March 02, 2023 aggressively hiked the benchmark policy rate by 300 basis points to 20 per cent.
Analysts at Ismail Iqbal Securities stated that the finance ministry had issued notification for removing the Asset to Deposit Ratio (ADR) tax from calendar year 2023 or Tax Year 2024.
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It is important to note that the government had imposed a higher rate of tax on investment in government securities up to 55 per cent.
The analysts said that the banks would be charged 43 per cent tax rate i.e. 39 per cent base tax and 4 per cent super tax on their income for the year under review.
They further stated that though the increased ADR tax had no material impact on banks earnings as almost all banks were able to achieve the 50 per cent ADR target in the fourth quarter of calendar year 2022, the development had impacted the deposit growth.
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Banking industry deposit growth ended at 7.1 per cent for 2022, which was growing at an average of 15.7 per cent during 11 months of calendar year 2022, a potential loss of deposit worth Rs1.8 trillion.
The analysts said that removal of ADR tax will incentivize banks to take on high-cost deposits. “Higher deposits will mean more funds available for bank to invest in government securities, which will help the government in domestic borrowing, reliance on which has increased drastically amid absence of foreign funding,” they added.
The analysts further said that it would be earnings positive for the banks. However, the quantum would depend upon banks strategy, which would vary from bank to bank.
“Given extremely high rates, some banks might not be as aggressive in taking on high-cost deposits as they do in low interest environment.”
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The analysts said that recently, the government had also taken some other measures to increase availability of fund. The government has waived tax on non-resident banking companies, investing in government securities.
Besides, PEPRA rules related to direct borrowing from commercial banks have been relaxed, they added.
The analysts said that effective tax rates on banks earnings to come down by year end. According to a survey some banks would observe a decline in effective tax rate to 41 per cent by end of calendar year 2022 from 47 per cent during fourth quarter of calendar year 2022.
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Khurram Schehzad, an investment banker, said that the growth in banks’ profits is primarily due to weakening public finances/government inefficiencies on the fiscal side, as Pakistan’s banks, most of them, drive most of their income through treasuries, instead of lending business. This has been the case in the last 10-12 years now.
“Most banks’ treasuries, even those of DFIs, and other FIs too, drive most of their income through investing in Treasury bills/government bonds, and not primarily through commercial lending and/or project finance (the two major areas of banking/DFIs),” he added.